In September 2024, the Federal Reserve cut its main interest rate by 0.5%, the first big cut in four years. Many people thought this would lower mortgage rates significantly, but the drop has been smaller than expected. Here’s a breakdown of how the Fed’s decision affects mortgage rates and what it means for people looking to buy homes.
How the Fed’s Rate Cuts Affect Mortgage Rates
It’s important to know that while the Fed influences mortgage rates, it doesn’t set them directly. The Fed controls the federal funds rate, the interest rate banks charge each other for overnight loans. When the Fed cuts this rate, it usually lowers borrowing costs for things like credit cards, car loans, and adjustable-rate mortgages (ARMs) or home equity lines of credit (HELOCs).
However, fixed-rate mortgage rates are mostly tied to long-term government bond yields, which are affected by things like inflation and the overall economy.
Small Declines in Mortgage Rates
Before the Fed announced the rate cut, lenders had already lowered mortgage rates slightly, anticipating that the cut would happen. Mortgage rates dropped by about 23 basis points (0.23%) before the Fed’s meeting. After the cut, mortgage rates stayed lower, giving home buyers some relief but not the big drop many had hoped for.
This slight rate decline is happening while the housing market still has low inventory, which keeps home prices high. So, even though lower rates can reduce monthly mortgage payments, high home prices are still a challenge for buyers.
Why Mortgage Rates Aren’t Dropping Faster
Even though the Fed’s rate cut is meant to boost the economy, other factors are keeping mortgage rates high. While inflation is slowing down, it is still above the Fed’s target of 2%. Plus, the Fed raised rates aggressively in recent years to fight inflation, pushing mortgage rates to their highest levels in 23 years.
It will take time for the market to fully adjust to the new lower rates.
Fixed mortgage rates are also influenced by 10-year Treasury bond yields, which haven’t dropped enough to push mortgage rates down to the low levels seen during the pandemic. Experts think mortgage rates may keep falling slowly, but it’s unlikely we’ll see them go below 4% anytime soon.
What This Means for Homebuyers
The Fed’s rate cut gives hope to homebuyers waiting for lower mortgage rates, but keeping expectations realistic is important.
The days of 3% mortgage rates are probably over, and while rates under 6% are better than earlier in 2024, home prices are still high due to a shortage of available homes. Buyers looking to get a fixed-rate mortgage might find slightly lower rates, but they should be ready for a competitive market.
People with adjustable-rate mortgages or those considering HELOCs may benefit more from the Fed’s actions because these rates are tied more closely to the federal funds rate and could drop faster.
Conclusion
If you’re planning to buy a home, it’s a good time to explore your options and talk to a mortgage lender to lock in a rate that works for you. The Fed’s actions are helping, but the full impact on the housing market will take time to show.